Homogeneity in loans needed for project finance CLOs to prosper
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Homogeneity in loans needed for project finance CLOs to prosper

Construction cranes at work site in Las Vegas, Nevada

Niche asset class is some 20 years behind traditional CLOs, say SF Vegas panelists

Project finance CLOs are slowly progressing, with more deals expected later this year. But teething problems remain, according to panelists at SF Vegas, largely related to project finance loan agreements being unsuitable to securitization.

Mahesh Assomull, director at MUFG, told delegates at the Structured Finance Association's annual conference that he expects issuance of project finance CLOs to increase as credit markets stabilize — potentially as soon as the second half of 2023.

MUFG, due to its expertise in project finance, has been at the forefront of project finance CLOs, helping Starwood issue a $500m transaction in 2021.

However, while there have been a handful of similar deals — despite a slowdown in 2022 — Steven Kolyer, partner at Sidney Austin, said that the loan structure needs time to be easily transferred to securitizations.

"We've been pushing for greater homogenization to get the loans capital markets friendly," he said.

Assomull at MUFG agreed, saying that project finance CLOs are probably at the same stage of developmentas corporate CLOs around 20 years ago.

"Originally, loan credit agreements weren't built for securitization but, as the market evolves, it's going to be easier to align," he said.

In addition, the assets are typically less liquid, with the secondary trading market still at a nascent stage.

"There really isn't a secondary market yet," Assomull said.

However, with the potential to start including commercial solar projects, alongside ESG screening tools, the hope is that project finance CLOs could yet develop into a strong ESG-friendly asset class in the coming years.

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